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Lord Higgins: I am not clear what difference the directive makes.
Lord Oakeshott of Seagrove Bay: Perhaps I may ask a short question. At the bottom of page 159 the Bill states:
"Regulations under subsection (1) may, in particular ... specify criteria to be applied in choosing investments".
Are there regulations in existence now under this clause, and if not can the Minister give us any idea of what sort of criteria might be applied? I am just a little concerned.
The Deputy Chairman of Committees (Lord Ampthill): Perhaps it would be better if we waited until after the Division for the Minister's reply to the noble Lord. We will meet again in 10 minutes.
[The Sitting was suspended for a Division in the House from 4.49 to 4.59 p.m.]
Lord Higgins: We were discussing Clause 234 when the Division was called. If I could encapsulate my concern, the noble Baroness appears to be saying that
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the clause does not do anything at all but is necessary in order to implement the European directive. I assume that there must be some difference between the present circumstances and what is stated in the European directive, but I am not in the least bit clear about what that difference is. As I said previously, regulations specifying the criteria to be used and so on could be open to abuse and I am concerned about that.
Baroness Hollis of Heigham: I am not sure that I can help the noble Lord very much further. The advice that I have confirms what I said to the noble Lord; namely, that the directive puts into UK law the "prudent person" principle which is already established in trust law. There should not need to be any change in investment strategy. These statutory provisions are necessary to ensure that the occupational pensions directive is implemented in a transparent manner. The relevant regulations do not currently exist but the criteria to be applied under Clause 234(2)(1A) will include the need for diversification, the need to be prudent and to secure the quality of the portfolio as a whole, as required in the EU directive.
I was specifically asked what difference, if any, the measure would make on the ground. I am advised that in practice it should make none whatever; it is about making our legislation transparent and compliant with the directive. That is consistent throughout. After all, we are seeking to ensure that what we believe to be not only good but best practice is not deformed for any other reason.
Lord Higgins: This seems a very strange situation, but no doubt it is what we must expect if we go along with directives into which we seem to have had remarkably little input.
Clause 235 [Borrowing by trustees]:
On Question, Whether Clause 235 shall stand part of the Bill?
Lord Higgins: I wish to make one quick point. Trustees are not allowed to borrow money except in prescribed circumstances. Perhaps we could save the draftsmen the trouble of drafting the relevant regulations if the noble Baroness puts on the face of the Bill what those prescribed circumstances are. She must have a fairly clear idea what they are. I see no reason why they cannot be on the face of the Bill with necessary provisions for amending in the light of changed circumstances.
Baroness Hollis of Heigham: I would not wish to put it on the face of the Bill but I am perfectly willing to put on the face of Hansard that regulations made under this power would specify that trustees may borrow only where that was on a temporary basis and for liquidity purposes and would prohibit trustees from acting as guarantors. We have consulted in broad terms on this. The industry thinks that it is a useful backstop. It could not advise us of particular circumstances where it might come into play but it considers that it would be useful to have that power. Regulations will, therefore, indicate that.
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We plan to use the directive's small scheme exemption to exempt small, self-administered schemes from these provisions. Such schemes will, however, be bound by the rules set by the Inland Revenue. I hope that helps the noble Lord. The provision is regarded as useful by the industry. It could not cite a particular example of where it might wish to use it, although I have pursued that point. I failed to get such an example. That is what the regulations will do. It seems a useful reserve power.
Lord Higgins: I am grateful for that explanation. No doubt between now and Report we can draft an amendment that will avoid the problem of producing the regulations.
Clause 236 [Requirement for knowledge and understanding: individual trustees]:
Baroness Hollis of Heigham moved Amendment No. 300C:
On Question, amendment agreed to.
On Question, Whether Clause 236, as amended, shall stand part of the Bill?
Lord Skelmersdale: Clauses 236, 237 and the supplementary Clause 238 relate to the requirement for knowledge and understanding of trustees of miscellaneous description—in fact, two descriptions, because there are two clauses dealing with those trustees. The noble Baroness, Lady Dean, mentioned that it was some years ago that she went on her first pensions course, no doubt courtesy of her union at that time. But I could not find any place in the clauses where there was a requirement for education of the trustees. That seems absolutely essential, and I hope that the noble Baroness will agree with me.
Lord MacGregor of Pulham Market: I follow on from that point. In fact, it is clear from the Explanatory Notes that the regulator will give a lot of advice about how much of the process will be carried out. However, I should like to know how far that goes. I have heard debates along these lines, and there is a real danger if one goes too far. I accept the need for knowledge and training, but if it goes too far it will become extremely difficult to find people willing to come forward to be trustees—particularly employee trustees. Will the Minister indicate what she expects the regulator to do in terms of training courses, qualifications achieved, and so on?
One must also bear in mind that most trustees are guided by a great deal of professional advice in so many of the relevant matters, such as investment management and actuarial matters—indeed, in all general process matters dealing with legal and compliance requirements which actuarial firms provide. I would be interested to know whether it is expected that trustees will have to reach something approaching the level of the advice that they are given.
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If that happens, combined with the liabilities that trustees face, it will be increasingly difficult to attract people to do the job.
I was chairman of the House of Commons pension fund trustees for some time. We were fortunate when I was chairman in having a number of members who had a reasonable amount of experience; but it was always difficult to attract people to become trustees and, if they were required to go on training courses and undertake all sorts of qualifications, I suspect that it would become even more difficult to get all the trustees required. There is clearly a balance to be struck here, and I should be interested to hear how the Government are approaching that matter.
I meant to raise a point about Clause 233, but it is relevant here, too. The Explanatory Notes on Clause 233 say that before a statement of investment principles is prepared or revised, trustees must,
"obtain and consider written advice from somebody they reasonably believe to be qualified by ability in and practical experience of financial matters and who has the appropriate knowledge and experience of the management of investments of such a scheme".
Given the training that trustees will undertake, and particularly given that they will be people with a great deal of knowledge and experience who are prepared to take on the trusteeship, if they have within their midst people with as much practical experience and knowledge as any professional adviser from outside, will it be sufficient for one of them to consider the written advice? I suspect that a number of trustees will consider it unnecessary to incur extra expenditure when it will merely duplicate what they already know.
Lord Oakeshott of Seagrove Bay: I have a question on the relationship between Clause 238(2) and Clauses 236 and 237. Would that subsection make it possible effectively to repeal or water down substantially those clauses, which set out sensible basic requirements for knowledge and understanding for trustees? Do we really want to run the risk that the provisions could be watered down?
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